Instructions for Form 1116 Foreign Tax Credit (Individual, Estate, or Trust)

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1 2009 Instructions for Form 1116 Foreign Tax Credit (Individual, Estate, or Trust) Department of the Treasury Internal Revenue Service Section references are to the Internal K-1 (Form 1041), Schedule K-1 (Form See Foreign Taxes Eligible for a Revenue Code unless otherwise noted. 1065), Schedule K-1 (Form 1065-B), Credit on page 2 to determine if the Schedule K-1 (Form 1120S), or similar taxes you paid or accrued qualify for substitute statements. the credit. What s New Your total creditable foreign taxes are Do not use Form 1116 to figure a not more than $300 ($600 if married credit for taxes paid to the U.S. Virgin Foreign oil and gas income. filing a joint return). Islands. Instead, use Form 8689, Beginning in 2009, taxes on foreign oil This election is not available to Allocation of Individual Income Tax to related income will be subject to the estates or trusts. the U.S. Virgin Islands. same rules that apply to taxes on Nonresident aliens. If you are a foreign oil and gas extraction income in If you make this election: nonresident alien, you generally cannot determining the amount allowed as a You cannot carry over to any other take the credit. However, you may be foreign tax credit. For more information, year any foreign taxes paid or accrued able to take the credit if: see Taxes on combined foreign oil and in a tax year to which the election You were a resident of Puerto Rico gas income under Line 12 on page 15. applies (but carryovers to and from during your entire tax year, or other years are unaffected). See the You pay or accrue tax to a foreign instructions for line 10 on page 15. country or U.S. possession on income General Instructions You are still required to take into from foreign sources that is effectively account the general rules for connected with a trade or business in Election To Claim the determining whether a tax is creditable. the United States. But if you must pay Foreign Tax Credit See Foreign Taxes Eligible for a Credit tax to a foreign country or U.S. and Foreign Taxes Not Eligible for a possession on income from U.S. Without Filing Form 1116 Credit on page 2. sources only because you are a citizen You may be able to claim the foreign You are still required to reduce the or a resident of that country or U.S. tax credit without filing Form By taxes available for credit by any amount possession, do not use that tax in making this election, the foreign tax you would have entered on line 12 of figuring the amount of your credit. credit limitation (lines 14 through 20 of Form See the instructions for Line 12 on page 15. See section 906 for more information the form) will not apply to you. This on the foreign tax credit allowed to a election is available only if you meet all To make the election, just enter on nonresident alien individual. of the following conditions. the foreign tax credit line of your tax return (for example, Form 1040, line 47) All of your foreign source gross Credit or Deduction the smaller of (a) your total foreign tax income was passive category income Instead of claiming a credit for eligible or (b) your regular tax (for example, (which includes most interest and foreign taxes, you can choose to Form 1040, line 44). dividends) (see page 3). However, for deduct foreign income taxes. Form 1040 filers choosing to do so would this purpose, passive income also Purpose of Form deduct foreign income taxes on includes (a) income subject to the special rule for high-taxed income Who should file. File Form 1116 to Schedule A (Form 1040), Itemized described on page 3, and (b) certain claim the foreign tax credit if the Deductions. Generally, if you take the export financing interest. election above does not apply and: credit for any eligible foreign taxes, you All the income and any foreign taxes You are an individual, estate, or trust, cannot take any part of that year s paid on it were reported to you on a and foreign taxes as a deduction. However, qualified payee statement. Qualified You paid or accrued certain foreign even if you take the credit for eligible payee statements include Form taxes to a foreign country or U.S. foreign taxes for the year, you can take 1099-DIV, Form 1099-INT, Schedule possession. a deduction for: Foreign taxes not allowed as a credit because of boycott provisions. Tax Help Taxes paid to certain foreign countries for which a credit has been For more information about, or assistance with figuring, the foreign tax credit, the following denied, as described in item (2) under IRS resources are available. Foreign Taxes Not Eligible for a Credit on page 2. IRS Contacts Call (in U.S. and Puerto Rico). Taxes on income or gain that are not Call (overseas) (not toll free). creditable because you do not meet the Contact IRS offices at U.S. Embassies in Beijing, London, holding period requirement, as described in item (3) or (5) under Paris, or the U.S. consulate in Frankfurt. Foreign Taxes Not Eligible for a Credit Write to Internal Revenue Service, International Section, on page 2. P.O. Box 920, Bensalem, PA Taxes on income or gain that are not creditable because you have to make Publications Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens related payments, as described in item Abroad. (4) or (6) under Foreign Taxes Not Pub. 514, Foreign Tax Credit for Individuals. Eligible for a Credit on page 2. Pub. 519, U.S. Tax Guide for Aliens. Certain taxes paid or accrued to a Pub. 570, Tax Guide for Individuals With Income From U.S. foreign country in connection with the purchase or sale of oil or gas extracted Possessions. in that country, as described in item (8) Pub. 575, Pension and Annuity Income. under Foreign Taxes Not Eligible for a Credit on page 2. Cat. No F

2 If you want to change your election receive. You cannot claim a foreign tax country in which there is cumulative to take a deduction instead of a credit, credit for the withholding tax on these inflation during the 36 calendar months or a credit instead of a deduction, you dividends. immediately preceding the last day of must do so within a special 10-year 5. Foreign taxes withheld on income the calendar year of at least 30%, as limitation period. See Pub. 514 for more or gain (other than dividends) from determined by reference to the information. property if you have not held the consumer price index of the country property for at least 16 days within the listed in the monthly issues of Foreign Taxes Eligible 31-day period that begins 15 days International Financial Statistics, or a before the date on which the right to successor publication, of the for a Credit receive the payment arises. See International Monetary Fund. You can take a credit for income, war section 901(l) or Pub Election to use exchange rate on profits, and excess profits taxes paid or 6. Foreign taxes withheld on income date paid. If you have accrued foreign accrued during your tax year to any or gain (other than dividends) from taxes that you are otherwise required to foreign country or U.S. possession, or property to the extent you have to make convert using the average exchange any political subdivision (for example, related payments on positions in similar rate, you can elect to use the exchange city, state, or province), agency, or or related property. rate in effect on the date the foreign instrumentality of the country or 7. Payments of foreign tax that are taxes are paid if the taxes are possession. This includes taxes paid or returned to you in the form of a subsidy. denominated in a foreign currency. If accrued in lieu of a foreign or 8. Taxes paid or accrued to a any of the accrued taxes are unpaid, possession income, war profits, or foreign country in connection with the you must translate them into U.S. excess profits tax that is otherwise purchase or sale of oil or gas extracted dollars using the exchange rate on the generally imposed. For purposes of the in that country if you do not have an last day of the U.S. tax year to which credit, U.S. possessions include Puerto economic interest in the oil or gas, and those taxes relate. Once made, the Rico and American Samoa. the purchase price or sales price is election applies to the tax year for U.S. citizens living in certain treaty different from the fair market value of which made and all subsequent tax countries may be able to take an the oil or gas at the time of the years unless revoked with the consent additional foreign tax credit for foreign purchase or sale. of the IRS. It must be made by the due tax imposed on certain items of income 9. Foreign taxes paid or accrued on date (including extensions) for filing the from the United States. See Tax income for which you are claiming an tax return for the first tax year to which Treaties in Pub. 514 for details. If this exclusion on Form 8873, Extraterritorial the election applies. Make the election applies to you, use the worksheet near Income Exclusion. However, see by attaching a statement to the the back of Pub. 514 to help you figure section 943(d) for an exception for applicable tax return. this additional credit. certain withholding taxes. Special rules for a qualified business You cannot take a credit for any unit. If you have a qualified business Foreign Taxes Not interest or penalties you must pay. unit, see Pub. 514 for special rules for Eligible for a Credit converting foreign income and taxes You cannot take a credit for the Foreign Currency into U.S. dollars. You may have a following foreign taxes. qualified business unit if you own and Conversion operate a business or are 1. Taxes paid to a foreign country Report all amounts in U.S. dollars self-employed in a foreign country. that you do not legally owe, including except where specified otherwise in amounts eligible for refund by the Part II. If you have to convert from foreign country. If you do not exercise Foreign Tax Credit foreign currency, attach a detailed your available remedies to reduce the explanation of how you figured the Redeterminations amount of foreign tax to what you conversion rate. legally owe, a credit for the excess If you claim a credit for foreign taxes amount is not allowed. If you take a credit for taxes paid, the paid, and you receive a refund of all or conversion rate is the rate of exchange part of those taxes in a later year, you Example. Country X withholds $25 in effect on the day you paid the foreign must file an amended return reducing of tax from a payment made to you. taxes (or on the day the tax was the taxes credited by the amount Under the income tax treaty between withheld). If you receive a refund of refunded. the United States and Country X, you owe only $15 and can claim a refund foreign taxes paid, the conversion rate If you claim the foreign tax credit from Country X for the other $10. Only is the rate in effect when you paid the based on foreign taxes accrued instead $15 is eligible for the foreign tax credit taxes, not when you receive the refund. of foreign taxes paid, your credit must (whether or not you apply for a refund). If you choose to account for foreign be redetermined in any of the following 2. Taxes imposed by and paid to income taxes on an accrual basis, you situations. certain foreign countries. These must generally use the average 1. Your accrued taxes when paid countries are those designated by the exchange rate for the tax year to which differ from the amount you claimed as a Secretary of State as countries that the taxes relate. However, you cannot credit. repeatedly provide support for acts of do so if any of the following apply. 2. You do not pay the accrued taxes international terrorism, countries with 1. The foreign taxes are actually within 2 years after the close of the tax which the United States does not have paid more than 2 years after the close year to which they relate. diplomatic relations, or countries whose of the tax year to which they relate. If this applies to you, you must governments are not recognized by the 2. The foreign taxes are actually reduce the credit previously claimed by United States. Pub. 514 contains a list paid in a tax year prior to the year to the amount of the unpaid taxes. You of these countries. which they relate. will not be allowed a credit for the 3. Foreign taxes withheld on a 3. The foreign tax liability is unpaid taxes until you pay them. When dividend from a corporation, if you have denominated in any inflationary you pay the accrued taxes, you must not held the stock for at least 16 days currency. translate them into U.S. dollars using within the 31-day period that begins 15 Accrued foreign taxes not eligible for the exchange rate as of the date they days before the ex-dividend date. This conversion at the yearly average were paid. The foreign tax credit is required holding period is greater for exchange rate must be converted using allowed for the year to which the preferred-stock dividends attributable to the exchange rate on the date of foreign tax relates. See Foreign periods totaling more than 366 days. payment of the tax. However, accrued Currency Conversion earlier. See section 901(k)(3) or Pub but unpaid foreign taxes denominated 3. After you pay the accrued taxes, 4. Foreign taxes withheld on a in inflationary currency must be you receive a full or partial refund of dividend to the extent that you have to translated into U.S. dollars using the them. make related payments on positions in exchange rate on the last day of the 4. For taxes taken into account similar or related property. U.S. tax year to which those taxes when accrued but translated into dollars Example. You receive a dividend relate. on the date of payment, the dollar value subject to foreign withholding tax. You of the accrued tax differs from the dollar are obligated to pay someone else an Inflationary currency. Inflationary value of the tax paid because of amount equal to all these dividends you currency means the currency of a fluctuations in the exchange rate -2- Instructions for Form 1116 (2009)

3 between the date of accrual and the for labor or personal services Gains from the sale of inventory or date of payment. performed both inside and outside the depreciable property used in a trade or However, no redetermination is United States, special rules apply in business. required if the change in foreign tax determining the source of the compensation. Compensation (other Financial services income. In liability for each foreign country is less than fringe benefits) is sourced on a general, financial services income is than the smaller of: time basis. Fringe benefits (such as treated as general category income if it a. $10,000, or housing and education) are sourced on is derived by a financial services entity. b. 2% of the total dollar amount of a geographical basis. Or you may be You are a financial services entity if you the foreign tax initially accrued for that able to use an alternative basis to are predominantly engaged in the foreign country for the U.S. tax year. determine the source. If you use an active conduct of a banking, insurance, In this case, you must adjust your alternative basis, you may have to financing, or similar business for any U.S. tax in the tax year in which the check the box on line 1b (discussed on taxable year. Financial services income accrued foreign taxes are paid. page 13). See Pub. 514 for more of a financial services entity generally information. includes income derived in the active If any of the above situations occurs conduct of a banking, financing, after you file your return, you must file insurance or similar business. Financial Form 1040X, Amended U.S. Individual Categories of Income services income of a financial services Income Tax Return, or other amended Use a separate Form 1116 to figure the entity also includes passive income and return, to notify the IRS so that your credit for each category of foreign certain incidental income. U.S. tax for the year or years affected source income listed above Part I of can be redetermined. Complete and Form The following instructions If you qualify as a financial services attach to Form 1040X (or other tell you what kind of income to include entity because you treat certain items amended return) a revised Form 1116 in each category. For more information, of income as active financing income for the tax year(s) affected and a see Pub. 514, Code section 904, and under Regulations section statement that contains information Regulations sections and (e)(2)(i)(Y), you must show the sufficient for the IRS to redetermine type and amount of each item on an your U.S. tax liability. See Pub. 514 for attachment to Form more information. a. Passive Category Income High-taxed income. In some cases, Amended returns for all years Passive category income consists of passive income and taxes must be affected by foreign tax redeterminations passive income and specified passive treated as general category income and that result in U.S. tax deficiencies and category income. taxes. Generally, passive income and that occurred in 2005, 2006, and 2007, Passive category income does not taxes must be treated as general must be filed no later than the due date include gain from the sale of inventory category income if the foreign taxes of your 2009 tax return (including or property held primarily for sale to you paid on the income (after allocation extensions). customers in the ordinary course of of expenses) exceed the highest U.S. If you do not notify the IRS of a your trade or business; gain from tax that can be imposed on the income. foreign tax refund or change in commodities hedging transactions; and However, passive income that is! the dollar amount of foreign active business gains or losses of financial services income is treated as CAUTION taxes paid or accrued, you will have to producers, processors, merchants, or general category income regardless of pay a penalty unless you can show that handlers of commodities. It may also whether it is high-taxed income. See the failure to notify the IRS is due to not include dividends, interest, rents, or Pub. 514 and Regulations section reasonable cause and not due to willful royalties received from a controlled (c) for more information. neglect. foreign corporation (CFC) in which you are a U.S. shareholder who owns 10% c. Section 901(j) Income or more of the total voting power of all No credit is allowed for foreign taxes Income From Sources classes of the corporation s stock. imposed by and paid or accrued to Outside the Passive income. Passive income United States generally includes dividends, interest, certain sanctioned countries. However, income derived from each such country royalties, rents, annuities, gain from the is subject to a separate foreign tax Foreign source income generally sale of property that produces such credit limitation. Therefore, you must includes, but is not limited to, the income or of non-income-producing use a separate Form 1116 for income following. investment property, and gains from derived from each such country. Compensation for services foreign currency or commodities performed outside the United States. transactions. Capital gains not related These countries are those Interest income from a payer located to the active conduct of a trade or designated by the Secretary of State as outside the United States. business are also generally passive countries that repeatedly provide Dividends from a corporation income. support for acts of international incorporated outside the United States. terrorism, countries with which the Gain on the sale of nondepreciable Passive income does not include United States does not have diplomatic personal property you sold while export financing interest, active relations, or countries whose maintaining a tax home outside the business rents and royalties, or governments are not recognized by the United States, if you paid a tax of at high-taxed income (see High-taxed United States. Pub. 514 contains a list least 10% of the gain to a foreign income on this page). of these countries. country. Specified passive category income. Dividends from a DISC (domestic If you paid taxes to a country that Foreign source income generally international sales corporation) or ceased to be a sanctioned country does not include gain realized on the former DISC to the extent they are during the tax year, see Pub. 514 for sale or exchange of personal property treated as foreign source income, and details on how to figure the foreign tax by a U.S. resident as defined in section certain distributions from a former FSC credit for the period that begins after 865(g). (foreign sales corporation) are specified the end of the sanctions. Special rules apply in determining passive category income. Presidential waiver. The President of the source of income from the sale of the United States has the authority to inventory; sale of depreciable property b. General Category Income waive the denial of the credit with used in a trade or business; sale of General category income is income that respect to a sanctioned country if (a) it intangible property such as a patent, is not passive category income or is in the national interest of the United copyright, or trademark; ocean income described in categories c, d, States and will expand trade and activities; and transportation services and e, discussed later. General investment opportunities for U.S. that begin or end in the United States category income may include: companies in such sanctioned country, or a U.S. possession. See Pub. 514 for Wages, salary, and overseas and (b) the President reports to the more information. allowances of an individual as an Congress, not less than 30 days before Compensation for labor or personal employee. the waiver is granted, the intention to services as an employee. If you are Income earned in the active conduct grant such a waiver and the reason for an employee and receive compensation of a trade or business. such waiver. Instructions for Form 1116 (2009) -3-

4 Since no credit is allowed for See, for example, article 24, paragraph TIP Reporting Foreign Tax taxes paid to sanctioned 1, of the treaty between France and the countries, you would generally United States. Information From complete Form 1116 for this category Partnerships and S only through line 16. e. Lump-Sum Distributions Corporations d. Certain Income You can take a foreign tax credit for If you received a 2009 Schedule K-1 taxes you paid or accrued on a foreign from a partnership or S corporation that Re-sourced by Treaty source lump-sum distribution from a includes foreign tax information, use the If a sourcing rule in an applicable pension plan. Special formulas may be rules below to report that information on income tax treaty treats any of the used to figure a separate tax on a Form specific types of income described qualified lump-sum distribution for the below as foreign source, and you elect General Information for to apply the treaty, the income will be year in which the distribution is Partners and S Corporation treated as foreign source. received. See Pub. 575 for more Shareholders information. Certain gains (section 865(h)), or Less-than-10% limited partners and Certain income from a U.S.-owned If you are able to elect, and do elect, certain less-than-10% S corporation foreign corporation (section 904(h)(10)). to figure your U.S. tax on a lump-sum shareholders. If you are a limited See Regulations section (m)(7) distribution using Form 4972, Tax on partner or an S corporation shareholder for an example. Lump-Sum Distributions, a separate who does not actively participate in the Important. You must compute a foreign tax credit limitation applies. Use management of the S corporation and separate foreign tax credit limitation for a separate Form On this you own a less-than-10% interest (by any such income for which you claim separate Form 1116, check box e value) in the partnership or S benefits under a treaty, using a above Part I. Skip Part I. Complete Part corporation, you generally may assign separate Form 1116 for each amount of II showing only foreign taxes that are exclusively to passive category income re-sourced income from a treaty attributable to the lump-sum your distributive share of foreign source country. Add the amounts from line 21 distribution. Then, complete the income and deductions from that of each separate Form 1116 and enter Worksheet for Lump-Sum Distributions partnership or S corporation. See the total on line 24 of your summary on this page to figure the amounts to Regulations section (h)(2) for Form 1116 (that is, the Form 1116 for enter in Part III. more details and exceptions. which you are completing Part IV). In This rule takes precedence over addition, you may be required to file! the income category rules Form 8833, Treaty-Based Return Special Rules CAUTION outlined in the instructions that Position Disclosure Under Section 6114 follow for line 16, codes C and D F, (or or 7701(b) for the re-sourced income. Look-Through Rules line 14, codes C and D F) of the Certain income received or accrued by Schedule K-1, and the apportionment Other types of income that are TIP you as a 10%-or-more U.S. shareholder of deductions rules outlined in the re-sourced under the terms of in a controlled foreign corporation instructions on page 5 for line 16, an income tax treaty (for (CFC) is treated as income in one of codes H and I K, (or line 14 codes H example, compensation for services the separate categories listed under and I K) of the Schedule K-1. performed in the United States by a U.S. citizen resident in a foreign Categories of Income starting on page Reporting amounts on Form country) are not subject to a separate 3. For example, Subpart F inclusions, Include amounts reported to you on foreign tax credit limitation. However, dividends, interest, rents, and royalties Schedule K-1 with any other amounts the specific treaty may provide for other from a CFC are treated as separate reportable on Form 1116 using: restrictions on the amount of income category income to the extent they are A separate Form 1116 for each that is re-sourced or the amount of attributable to separate category category of income. credit that is allowed with respect to income of the CFC. See Regulations A separate column in Part I and a foreign tax paid on re-sourced income. section for more information. separate line in Part II for each country or possession. Explanation of Certain Line Items on Schedule K-1 Keep for Your Worksheet for Lump-Sum Distributions Records In each instance that follows, TIP the first line reference is to the Schedule K-1 for Form Enter the amount from Form 1116, line and the second line reference is to the 2. Enter the sum of the amounts from Form 4972, lines 6 and 12, Schedule K-1 for Form 1120S. (The Schedule K-1 for Form 1065-B includes that are from foreign sources. Also enter this amount all foreign tax information in box 9 or in on Form 1116, line an attachment for box 9.) 3. Enter the sum of the amounts from Form 4972, lines 6 and 12, Line 16, code B, or line 14, code B Gross income from all sources. that are from all sources (both U.S. and foreign). Also enter Combine your distributive share of this amount on Form 1116, line gross income from all sources with all of your other gross income and enter 4. Divide line 2 by line 3. Enter the result as a decimal (rounded the total on line 3e. Gross income from to at least four places) here and on Form 1116, line 18. If all sources is a constant amount (that line 2 is equal to or more than line 3, enter is, you will enter the same amount on line 3e of all Forms 1116 that you file). 5. Enter the amount from Form 4972, line 30. Also include Line 16, code C, or line 14, code this amount on Form 1116, line C Gross income sourced at partner or shareholder level. This line Caution: Do not include the amount on line 5 above in the includes income from the sale of tax you enter on line 19 of any other Form 1116 you eligible personal property (most are filing. personal property other than inventory, depreciable property, and certain 6. Multiply line 5 by line 4. Enter the result here and on intangible property). See Pub. 514 for Form 1116, line details. 7. Enter the smaller of line 1 or line 6 here and on Form 1116, Although all income reported to! you on this line of the Schedule line 21. To the left of line 21, write LSD CAUTION K-1 has been apportioned to separate categories of income, you -4- Instructions for Form 1116 (2009)

5 must nevertheless first determine corporation level. Income reported should not be entered on any line of (using the rules below) whether the on this line has already been sourced Part I of Form income on this line is U.S. source for you by the partnership or S Line 16, codes I, J, and K, or line 14, income or foreign source income. Then, corporation. The partnership or S codes I, J, and K Deductions enter only foreign source income in Part corporation has reported this income to allocated and apportioned at I of each of the applicable Forms 1116 you by country and by category of partnership or S corporation level to (that is, those Forms 1116 for each income. Include these amounts in Part I foreign source income. The category of income you received from of each of the applicable Forms 1116 partnership or S corporation has the partnership or S corporation). (that is, those Forms 1116 for each already allocated these expenses to Use the following rules to source the category of income you received). foreign source income and has reported income reported to you on this line of You should disregard any them to you by country and by category the Schedule K-1. If you are a U.S. TIP information shown on your of income. Include these amounts on resident (as defined below), the income Schedule K-1 pertaining to line 2 of each of the applicable Forms is U.S. source income. If you are a gross income attributable to a foreign 1116 (that is, those Forms 1116 for nonresident (as defined below), the branch. It is intended only for corporate each category of income you received). income is foreign source income. partners preparing Form You should disregard any U.S. resident. A U.S. resident is a Line 16, code G, or line 14, code TIP information shown on your U.S. citizen or resident alien who does G Interest expense. See the Schedule K-1 pertaining to not have a tax home in a foreign instructions for line 4b on page 14 to definitely allocable deductions country or a nonresident alien who has allocate and apportion the interest attributable to a foreign branch. It is a tax home in the United States. expense shown on this line of Schedule intended only for corporate partners Tax home. Generally, your tax K-1. In applying those instructions, take preparing Form home is the general area of your main into account your distributive share of Line 16, codes L and M, or line 14, place of business, employment, or post the partnership s or S corporation s codes L and M Total foreign taxes. of duty, regardless of where you gross income (for purposes of the The partnership or S corporation has maintain your family home. Your tax $5,000 threshold) or your pro rata already allocated and apportioned total home is the place where you are share of the partnership s or S foreign taxes for you and has reported permanently or indefinitely engaged to corporation s assets. However, if you them to you by country and by category work as an employee or self-employed were a limited partner or an S of income. Include these amounts in individual. If you do not have a regular corporation shareholder who did not Part II of each of the applicable Forms or main place of business because of actively participate in the management 1116 (that is, those Forms 1116 for the nature of your work, then your tax of the S corporation and your interest in each category of income you received). home is the place where you regularly the partnership or S corporation was less than 10%, see the next paragraph. Line 16, code N, or line 14, code live. If you do not fit either of these Include interest expense that you N Reduction in taxes available for categories, you are considered an allocate to foreign source income on credit. The partnership or S itinerant and your tax home is wherever line 4b of the applicable Form Do corporation has already apportioned the you work. not enter in Part I of Form 1116 any reduction in taxes available for credit Nonresident. A nonresident is any interest expense that you allocate to and has reported it to you by country person who is not a U.S. resident. U.S. U.S. source income. and by category of income. Include citizens and resident aliens with a Less-than-10% limited partners these amounts on line 12 of each of the foreign tax home will not be treated as and certain less-than-10% S applicable Forms 1116 (that is, those nonresidents for a sale of eligible corporation shareholders. If you are Forms 1116 for each category of personal property unless a foreign tax a limited partner or an S corporation income you received). of 10% or more was paid or accrued on shareholder (who does not actively the gain on the sale (or, in the case of a participate in the management of the S Foreign Qualified loss sale, a foreign tax of 10% or more corporation) and you own (directly or would have been paid had the sale Dividends and Capital indirectly) a less-than-10% interest (by resulted in a gain). income) in the partnership or S Gains (Losses) Note. To help you with these rules, the corporation, you may generally allocate If you have foreign source qualified partnership or S corporation has your distributive share of interest dividends or foreign source capital specifically identified the following. expense from that partnership or S gains (including any foreign source Gains on the sale of eligible personal corporation to foreign or U.S. source capital gain distributions) or losses, you property for which a foreign tax of 10% income based on your distributive share may be required to make certain or more was paid or accrued. of the gross foreign or U.S. source adjustments to those amounts before Losses on the sale of eligible income of that partnership or S taking them into account on line 1a personal property for which a foreign corporation. The interest expense you (gross income) or line 5 (losses). tax of 10% or more would have been allocate to foreign source income generally may be apportioned If you completed the Qualified paid had the sale resulted in a gain. exclusively to passive category income. Dividends and Capital Gain Tax Include foreign source income in However, see Temporary Regulations Worksheet in the instructions for your Part I of the applicable Form 1116 (that section T(e)(4) for exceptions. tax return, and are not required to file is, the Form 1116 for each category of Schedule D, see Qualified Dividends income provided to you for this line of Line 16, code H, or line 14, code and Capital Gain Tax Worksheet the Schedule K-1). Do not include in H Other expenses. This line (Individuals), next, to determine the Part I of Form 1116 income that you includes expenses (other than interest adjustments you may be required to determined (using the above rules) to expense) of the partnership or S make. If you completed the Qualified be U.S. source income. corporation that must be allocated and Dividends Tax Worksheet in the apportioned at the partner or Instructions for Form 1041, see If the partnership or S shareholder level (for example, Qualified Dividends Tax Worksheet! corporation has specifically research and experimental expenses). (Estates and Trusts), later, to determine CAUTION identified any capital gains or Combine your distributive share of the adjustments you may be required to losses or unrecaptured section 1250 these expenses with all of your other make. If you are required to file gain on this line (Schedule K-1, line 16, like expenses, if any, and then allocate Schedule D, see Schedule D Filers, on code C, or line 14, code C) and you and apportion them using the the next page, to determine the have determined that those gains or applicable rules (for example, for adjustments you may be required to losses are foreign source, see Foreign research and experimental expenses, make. Qualified Dividends and Capital Gains the rules under Regulations section You can elect not to make the (Losses) on this page before entering (f)). adjustments to your qualified dividends an amount in Part I of Form Include expenses that you allocate and capital gains if you qualify for the Line 16, codes D, E, and F, or line 14, to foreign source income on line 2 of adjustment exception. See Adjustment codes D, E, and F Foreign gross the applicable Form Expenses exception under Qualified Dividends income sourced at partnership or S that you allocate to U.S. source income and Capital Gain Tax Worksheet Instructions for Form 1116 (2009) -5-

6 (Individuals), Qualified Dividends Tax c. $171,550 if you checked filing if the foreign source qualified Worksheet (Estates and Trusts), and status box 1 or 2. dividends are taxed at a rate of 15%. Schedule D Filers. 2. The amount of your foreign Include the results on line 1a. source capital gain distributions, plus You adjust your foreign source Qualified Dividends and the amount of your foreign source qualified dividends taxed at the 0% rate Capital Gain Tax Worksheet qualified dividends, is less than by not including them on line 1a. $20,000. (Individuals) Amounts taxed at the 0% rate are on If you completed the Qualified How to make adjustments. To adjust line 8 of the Qualified Dividends Tax Dividends and Capital Gain Tax your foreign source qualified dividends Worksheet. Worksheet in your tax return or capital gain distributions, multiply Do not adjust the amount of any instructions and you do not have to file your foreign source qualified dividends! foreign source qualified Schedule D, you may have to adjust or capital gain distributions in each CAUTION dividends that you elected to the amount of your foreign source separate category by if the include on Form 4952, line 4g. qualified dividends and capital gain foreign source qualified dividends or capital gain distributions are taxed at a No adjustment required. If you are distributions. rate of 15%. Include the results on line not required to make adjustments to Form 1040 filers. You must adjust the 1a of the applicable Form your foreign source qualified dividends amount of your foreign source qualified (or you qualify for the adjustment dividends and capital gain distributions You adjust your foreign source exception and you elected not to adjust if both of the following apply: qualified dividends or capital gain these dividends), include your foreign Line 7 of the Qualified Dividends and distributions taxed at the 0% rate by source qualified dividends on line 1a of Capital Gain Tax Worksheet is greater not including them on line 1a. Amounts the applicable Form 1116 without than zero. taxed at the 0% rate are on line 10 of adjustment. Line 16 of the Qualified Dividends the Qualified Dividends and Capital and Capital Gain Tax Worksheet is less Gain Tax Worksheet in the Form 1040 Schedule D Filers than line 17 of that worksheet. instructions and line 8 of the Qualified Note. Throughout these instructions, Dividends and Capital Gain Tax references to Schedule D (Form 1041) Form 1040NR filers. You must adjust Worksheet in the Form 1040NR are for estates and trusts only. the amount of your foreign source instructions. qualified dividends and capital gain Adjustments to foreign qualified distributions if both of the following Do not adjust the amount of any dividends. If you are required to file apply:! foreign source qualified Schedule D (Form 1040, or Form CAUTION Line 5 of the Qualified Dividends and dividends or capital gain 1041), you must adjust the amount of Capital Gain Tax Worksheet is greater distributions that you elected to include your foreign source qualified dividends than zero. on Form 4952, line 4g. that you include on line 1a of Form Line 14 of the Qualified Dividends No adjustments required. If you are 1116 if one of the following applies to and Capital Gain Tax Worksheet is less not required to adjust the amount of you. than line 15 of that worksheet. your foreign source qualified dividends 1. You figured your tax using the Adjustment exception. If you qualify or capital gain distributions, or you Qualified Dividends and Capital Gain for the adjustment exception, you can qualify for the adjustment exception and Tax Worksheet in the Form 1040 elect not to adjust your foreign source elect not to adjust these items, include instructions, line 7 of that worksheet is capital gain distributions and qualified the amount of your foreign source greater than zero, and line 16 of that dividends. You make this election by qualified dividends and capital gain worksheet is less than line 17. not adjusting these items. If you make distributions in each separate category 2. You figured your tax using the this election, you must elect not to (without adjustment) on line 1a of the Qualified Dividends and Capital Gain adjust any of your foreign source applicable Form Tax Worksheet in the Form 1040NR qualified dividends or capital gain instructions, line 5 of that worksheet is Qualified Dividends Tax distributions. greater than zero, and line 14 of that Worksheet (Estates and worksheet is less than line 15. Adjustment exception for Form Trusts) 3. You figured your tax using 1040 filers. You qualify for the Schedule D (Form 1041), line 23 of adjustment exception if you meet both If you completed the Qualified Schedule D is greater than zero, and of the following requirements. Dividends Tax Worksheet in the line 32 of Schedule D is less than line Instructions for Form 1041, you must 1. Line 7 of the Qualified Dividends 33. adjust the amount of your foreign and Capital Gain Tax Worksheet does 4. You figured your tax using the source qualified dividends if: not exceed: Schedule D Tax Worksheet (in the Line 5 of the Qualified Dividends Tax a. $208,850 if married filing jointly or Schedule D (Form 1040) instructions or Worksheet is greater than zero, and qualifying widow(er), in the Schedule D (Form 1041) Line 14 of the Qualified Dividends b. $104,425 if married filing instructions), line 17 of the Schedule D Tax Worksheet is less than line 15 of separately, Tax Worksheet is greater than zero, that worksheet. c. $171,550 if single, or and line 34 of the Schedule D Tax d. $190,200 if head of household. Adjustment exception. If you Worksheet is less than line The amount of your foreign qualify for the adjustment exception, you can elect not to adjust your foreign Adjustment exception. If you source capital gain distributions, plus source qualified dividends. You make qualify for the adjustment exception, the amount of your foreign source this election by not adjusting these you can elect not to adjust your foreign qualified dividends, is less than dividends. If you make this election, source qualified dividends. You make $20,000. For this purpose, ignore any you must elect not to adjust any of your this election by not adjusting these capital gain distributions or qualified foreign source qualified dividends. You dividends or your foreign capital gains dividends you elected to include on qualify for the adjustment exception if: (or losses). If you make this election, Form 4952, line 4g. 1. Line 5 of the Qualified Dividends you must elect not to adjust any of your Tax Worksheet does not exceed foreign source qualified dividends. You Adjustment exception for Form $8,200, and qualify for the adjustment exception if 1040NR filers. If you file Form 2. The amount of foreign source the amount of your foreign source net 1040NR, you qualify for the adjustment qualified dividends reported on Form capital gain, plus the amount of your exception if you meet both of the 1041, line 2b(2), is less than $20,000. foreign source qualified dividends, is following requirements. For this purpose, ignore any qualified less than $20,000 and one of the 1. Line 5 of the Qualified Dividends dividends you elected to include on following applies to you. and Capital Gain Tax Worksheet does Form 4952, line 4g. 1. Line 7 of the Qualified Dividends not exceed: and Capital Gain Tax Worksheet in the a. $208,850 if you checked filing How to make adjustment. To adjust Form 1040 instructions or line 17 of the status box 6, your foreign source qualified dividends, Schedule D Tax Worksheet in the b. $104,425 if you checked filing multiply your foreign source qualified Schedule D (Form 1040) instructions is status box 3, 4, or 5, or dividends in each separate category by less than or equal to: -6- Instructions for Form 1116 (2009)

7 a. $208,850 if married filing jointly or Do not adjust the amount of any include on Form 4952, line 4g, is zero qualifying widow(er),! foreign source qualified or less, (b) line 7 of that worksheet is b. $104,425 if married filing CAUTION dividends that you elected to zero, or (c) line 16 of that worksheet is separately, include on Form 4952, line 4g. equal to or greater than line 17. c. $171,550 if single, or No adjustment required. If you You figured your tax using the d. $190,200 if head of household. are not required to adjust your foreign Qualified Dividends and Capital Gain 2. Line 5 of the Qualified Dividends source qualified dividends (or you Tax Worksheet in the Form 1040NR and Capital Gain Tax Worksheet in the qualify for the adjustment exception and instructions and (a) line 3 of that Form 1040NR instructions or line 17 of elect not to adjust these dividends), worksheet is zero, (b) line 5 of that the Schedule D Worksheet in the include on line 1a of Form 1116 the full worksheet is zero, or (c) line 14 of that Schedule D (Form 1040) instructions is amount of foreign source qualified worksheet is equal to or greater than less than or equal to: dividends without adjustment. line 15. a. $208,850 if you checked filing You figured your tax using Schedule status box 6, Adjustments to foreign capital gains D (Form 1041) and (a) line 23 of b. $104,425 if you checked filing and losses. You must use Worksheet Schedule D is zero, (b) line 18 of status box 3, 4, or 5, or A, Worksheet B, or the instructions for Schedule D minus the amount on Form c. $171,550 if you checked filing Capital Gains and Losses in Pub , line 4e, that you elected to status box 1 or 2. to determine the adjustments you must include on Form 4952, line 4g, is zero 3. Line 23 of Schedule D (Form make to your foreign capital gains or or less, or (c) line 32 is equal to or 1041) or line 17 of the Schedule D Tax losses. Read the instructions below to greater than line 33. Worksheet in the Schedule D (Form see if you qualify to use Worksheet A or 1041) instructions is less than or equal You figured your tax using the Worksheet B. If you do not qualify to to $8,200. Schedule D Tax Worksheet (in the use Worksheet A or Worksheet B, use Schedule D (Form 1040) instructions or Note. Your foreign source net the instructions for Capital Gains and in the Schedule D (Form 1041) capital gain is the excess of your net Losses in Pub. 514 to determine the instructions) and (a) line 17 is zero, (b) long-term capital gain from foreign adjustments you must make. line 9 is zero or less, or (c) line 34 is sources over your net short-term capital equal to or greater than line 35. loss from foreign sources. Ignore any Before you complete Worksheet long-term capital gains you elected to! A or Worksheet B, you must Complete Worksheet A only once, CAUTION include on Form 4952, line 4g, in reduce each foreign source even if you have capital gains or losses determining your foreign source net long-term capital gain by the amount of in two separate categories. Keep the capital gain. Ignore any qualified that gain you elected to include on completed Worksheet A for your dividends you elected to include on Form 4952, line 4g. The gain you records. Do not file Worksheet A with Form 4952, line 4g, in determining the elected to include on Form 4952, line your tax return. amount of your foreign source qualified 4g, must be entered directly on line 1a dividends. of the applicable Form 1116 without Capital losses are deductible only up adjustment. How to make adjustment. To to $3,000 of ordinary income. adjust your foreign source qualified Worksheet A. You can use dividends, multiply your foreign source Worksheet B. If you do not qualify Worksheet A on page 8 to determine qualified dividends in each separate to use Worksheet A, use Worksheet B the adjustments you must make to your category by if the foreign source on page 9 to determine the adjustments foreign source capital gains or losses if qualified dividends are taxed at a rate you must make to your foreign source you have foreign source capital gains of 15%. Include the results on line 1a of capital gains or losses if: or losses in no more than two separate the applicable Form categories and any of the following You have foreign source capital apply. gains or losses in no more than two You adjust your foreign source You qualify for the adjustment separate categories, qualified dividends taxed at the 0% rate by not including them on line 1a. exception discussed earlier under You did not complete the Amounts taxed at the 0% rate are on Adjustments to foreign qualified Unrecaptured Section 1250 Gain the following line of the worksheet or dividends under Schedule D Filers and Worksheet or the 28% Rate Gain schedule you completed. you did not make any adjustments to Worksheet in the Schedule D your foreign qualified dividends (if any). instructions, and 1. Line 10 of the Qualified Dividends and Capital Gain Tax Worksheet in the Line 15 or 16 of Schedule D (Form You do not have any capital gains Form 1040 instructions. 1040) (line 14a or 15 of Schedule D taxed at a rate of 0%. 2. Line 8 of the Qualified Dividends (Form 1041)) is zero or a loss. and Capital Gain Tax Worksheet in the You figured your tax using the Complete Worksheet B only once, Form 1040NR instructions. Qualified Dividends and Capital Gain even if you have capital gains or losses 3. Line 19 of the Schedule D Tax Tax Worksheet in the Form 1040 in two separate categories. Keep the Worksheet. instructions and (a) line 3 of that completed Worksheet B for your 4. Line 26 of Schedule D (Form worksheet minus the amount on Form records. Do not file Worksheet B with 1041). 4952, line 4e, that you elected to your tax return. Instructions for Form 1116 (2009) -7-

8 Keep for Your Worksheet A (See instructions below) Records Category #1 Category #2 Specify 1. Separate category capital gain or (loss) Foreign source capital gain net income Capital gain net income Total U.S. capital loss adjustment Adjusted separate category capital gain U.S. capital loss adjustment factor. (For each separate category, divide line 1 by line 2 and round off the result to at least four decimal places.) U.S. capital loss adjustment. (For each separate category, multiply line 4 by line 6.) Adjusted separate category capital gain. (For each separate category, subtract line 7 from line 1. Enter the result here and include the result on line 1a of the applicable Form 1116.) Instructions for Worksheet A Line 1. For each separate category for which you have foreign source capital gains or losses, combine your foreign source capital gains and losses in that separate category and enter the result on line 1. Show a loss on line 1 of this worksheet as a negative amount and include the loss on line 5 of the Form 1116 you are filing for that separate category. Line 2. Combine the amounts entered on line 1. If the result is zero or less, do not complete the rest of the worksheet. Instead, for each separate category with a positive amount on line 1 of this worksheet, include that positive amount on line 1a of the Form 1116 you are filing for that separate category. Line 3. Enter the amount from line 16 of Schedule D (Form 1040), less the portion of net capital gain you included on Form 4952, line 4g. If the result is zero or less, enter -0-. Estates and trusts: Enter the amount from line 15 of Schedule D (Form 1041), less any amount shown on line 21 of that Schedule D. If the result is zero or less, enter -0-. Line 4. Subtract line 3 from line 2 and enter the result on line 4. If the result is zero or less, do not complete the rest of the worksheet. Instead, for each separate category with a positive amount on line 1 of this worksheet, include that positive amount on line 1a of the Form 1116 you are filing for that separate category. Line 5. If both separate categories have a positive amount on line 1, skip line 5 and go to line 6. If only one separate category has a positive amount on line 1, subtract line 4 from that positive amount. Enter the result here and include the result on line 1a of the Form 1116 you are filing for that separate category. Skip lines 6 8 of this worksheet. -8- Instructions for Form 1116 (2009)

9 Keep for Your Worksheet B (See instructions below) Records Category #1 Category #2 1. Separate category rate group capital gain or (loss) 2. U.S. capital loss adjustment amount 3. Subtotal (subtract line 2 from line 1 gain amounts) 4. Net U.S. long-term capital loss 5. U.S. long-term capital loss adjustment 6. Excess net U.S. long-term capital loss 7. Long-term capital gain (or adjustment amount) 8. Limitation percentage 9. Long-term limitation amounts 10. Adjustment amounts 11. Rate differential adjustments 12. Long-term gains 13. Rate differential adjustment 14. Long-term gain 15. Adjusted separate category capital gains and losses Specify Specify (1) (2) (3) (4) (5) Short-Term Long-Term Short-Term Long-Term Other (15%) (15%) Instructions for Form 1116 (2009) -9-

10 Instructions for Worksheet B Line 1. For each separate category: Combine your foreign source short-term capital gains and losses and enter the result in column (1) or (3). Combine your foreign source long-term capital gains and losses and enter the result in column (2) or (4). Line 2. Complete the Line 2 Worksheet on page 11 for each column on line 1 with a gain. Line 4. Enter your net long-term capital loss (if any) from U.S. sources. To determine this amount, subtract your long-term capital losses from U.S. sources from your long-term capital gains from U.S. sources. Enter the loss (if any) as a positive amount in column (5). If you do not have a loss, leave line 4 blank and skip lines 5 through 14. Line 5. Combine the amounts (if any) from columns (2) and (4) on line 2. Enter the result in column (5). If you do not have any amount entered in either column, enter -0- in column (5). Line 6. Subtract line 5 from line 4. Enter the result in column (5). If the result is zero or less, leave line 6 blank and skip lines 7 through 14 of this worksheet. Line 7. If you entered an amount in either column (2) or (4) (but not both) of line 3, subtract line 6 from the amount entered in either column (2) or (4) of line 3. Enter the result in column (2) or (4) on line 7 and skip lines 8 through 12. If you entered amounts in both columns (2) and (4) on line 3, combine those amounts and enter the result in column (5) on line 7. Line 8. Divide each amount on line 3 by line 7 and enter the results on line 8. Round off each result to at least four decimal places. Line 9. Multiply each decimal amount on line 8 by line 6 and enter the results in the appropriate columns on line 9. Line 10. Subtract line 9, column (2) from line 3, column (2) and enter the result on line 10, column (2). Subtract line 9, column (4) from line 3, column (4) and enter the result on line 10, column (4). Line 11. Multiply each amount on line 10 by and enter the results here. Line 12. Combine line 11, column (2) with line 9, column (2) and enter the result on line 12, column (2). Combine line 11, column (4) with line 9, column (4) and enter the result on line 12, column (4). Include the amounts on line 1a of the applicable Form Skip lines 13 and 14. Line 13. Multiply the amount on line 7 by and enter the result here in the applicable column. Line 14. Combine line 6 and line 13 and enter the result here. Include the result on line 1a of the applicable Form Line 15. If you have a: Short-term gain shown in column (1) or (3) of line 3, enter the amount of that short-term gain on line 15, column (1) or (3). Long-term gain shown in column (2) or (4) of line 3, and line 6 is blank, multiply the amount of each gain by and enter the result on line 15, column (2) or (4). Short-term loss in any column of line 1, complete the Line 15 Worksheet on page 12 for each column with a loss. Long-term loss in column (2) or (4) of line 1, multiply the amount of the loss by and enter the result on line 15 in the appropriate column. After you have completed line 15: Include line 15 gain amounts on line 1a of the applicable Form Include line 15 loss amounts on line 5 of the applicable Form Instructions for Form 1116 (2009)

11 Line 2 Worksheet (For Line 2 of Worksheet B) Keep for Your (See instructions below) Records Category #1 Category #2 Specify 1. Separate category rate group gain (or loss) Separate category gain (or loss) 2. Short-Term Long-Term Short-Term Long-Term 3. Foreign source capital gain net income Capital gain net income Total U.S. capital loss adjustment Separate category adjustment Rate Group Factor Rate Group Adjustment Instructions for Line 2 Worksheet Line 1. Enter your gains and losses from line 1 of Worksheet B. Enter a loss as a negative amount (in parentheses). Line 2. For each separate category, combine the amounts from line 1. Enter a loss as a negative amount (in parentheses). Line 3. Combine the amounts from line 2 of this worksheet. If the result is zero or less, stop here. Do not enter any amount on line 2 of Worksheet B. Line 4. Enter the amount from line 16 of the Schedule D (Form 1040), less the portion of net capital gain you included on Form 4952, line 4g. If the amount entered on line 4 is zero or less, stop here. Do not continue with this worksheet or Worksheet B. Instead, complete Worksheet A. Estates and trusts: Enter the amount from line 15 of the Schedule D (Form 1041), less any amount shown on line 21 of that Schedule D. If the amount entered on line 4 is zero or less, stop here. Do not continue with this worksheet or Worksheet B. Instead, complete Worksheet A. Line 5. Subtract line 4 from line 3 and enter the result on line 5. If the result is zero or less, stop here. Do not enter any amount on line 2 of Worksheet B. Line 6. If only one separate category has a positive amount on line 2, enter the amount from line 5 on line 6 (in the column for the separate category with the positive amount on line 2). If both separate categories have positive amounts on line 2, divide each amount on line 2 by line 3. Multiply each result by line 5. Enter the results on line 6 in the appropriate columns. Line 7. For each separate category: If you entered an amount on line 6 and you entered positive amounts in both the short-term and long-term columns on line 1, divide each positive amount on line 1 by line 2 and enter the results in the appropriate columns. Leave line 7 blank if you did not enter an amount on line 6 or only one column on line 1 has a positive amount. Line 8. For each separate category: If you entered amounts on line 7, multiply each amount on line 7 by line 6. Enter the results in the appropriate columns on line 8 of this worksheet and on line 2 of Worksheet B. If line 7 is blank, enter the amount from line 6 in the same column on line 8 as the column that has a gain on line 1. Also, enter the amount on line 2 of Worksheet B in the appropriate column. If line 6 is blank, do not enter any amount on line 8 of this worksheet or line 2 of Worksheet B. Instructions for Form 1116 (2009) -11-

12 Keep for Your Line 15 Worksheet (For Line 15 of Worksheet B) Records 1. Enter your net short-term capital gain (if any) from U.S. sources. To determine this amount, subtract your short-term capital losses from U.S. sources from your short-term capital gains from U.S. sources. If the result is zero or a loss, enter If you entered a short-term gain on line 3 of Worksheet B, enter that amount here Add lines 1 and Did you enter a short-term capital loss on line 1 of Worksheet B for one (but not both) of the separate categories? Yes. Complete lines 5 10 and skip the rest of this worksheet. No. Skip lines 5 10 and go to line Enter the short-term capital loss from line 1 of Worksheet B (enter the loss as a positive amount) Enter the gain, if any, determined on line 3. If line 3 is not a gain, enter Subtract line 6 from line 5. If zero or a loss, enter Multiply line 7 by Enter the smaller of line 5 or line Add lines 8 and 9. Enter the result here and on line 15 of Worksheet B Is the amount on line 1 zero? Yes. Multiply each short-term loss by Enter the results on line 15 of Worksheet B. Skip the rest of this worksheet. No. Go to line Enter your short-term loss from Worksheet B, line 1, column (1) (enter the loss as a positive amount) Enter your short-term loss from Worksheet B, line 1, column (3) (enter the loss as a positive amount) Add lines 12 and Enter the gain determined in line Subtract line 15 from line Is the result zero or less? Yes. Skip the rest of this worksheet. Enter each short-term loss from line 1 on line 15 of Worksheet B, in the applicable column, without adjustment (that is, each short-term loss you enter on line 15 of Worksheet B will be the same as the short-term loss you entered on line 1 of Worksheet B). No. Complete lines Multiply line 16 by Add lines 15 and Divide line 12 by line Multiply line 19 by line 18. Enter the result here and on Worksheet B, line 15, column (1) Divide line 13 by line Multiply line 21 by line 18. Enter the result here and on Worksheet B, line 15, column (3) Instructions for Form 1116 (2009)

13 Specific Instructions Foreign Qualified Dividends and Capital Gains (Losses) starting on page 5. High-taxed income. On your Form 1116 for passive category income, passive income that is treated as general category income because it is high taxed should be included on line The deduction for personal exemptions. (However, you can include the additional exemptions for housing Midwestern displaced individuals from Part I Taxable Income Form 8914, line 6.) or Loss From Sources Special rules apply to the allocation of research and experimental Outside the United 1a in the column for the country expenditures. See Regulations section entered on line g. Also, enter the high States taxed income in the HTKO column on If the law of a U.S. state to which Part I must be completed by all line 1a as a negative number. On your you pay income taxes does not Form 1116 for general category! filers unless specifically specifically exempt foreign source income, the high-taxed income should CAUTION indicated otherwise in these income from tax, you may be required instructions. be entered as a positive number on line to make a special allocation of state 1a in the HTKO column. taxes you paid. See Pub. 514 for more Line g Foreign Country or Line 1b information. U.S. Possession You must check the box on line 1b if all Itemized deduction limit. If you must Generally, if you received income from, of the following apply. reduce the total amount of your or paid taxes to, more than one foreign The income on line 1a is itemized deductions on line 29 of country or U.S. possession, report compensation for services you Schedule A (Form 1040) because your information on a country-by-country performed as an employee. adjusted gross income was more than basis on Form 1116, Parts I and II. Use Your total employee compensation $166,800 ($83,400 if married filing a separate column in Part I and a from both U.S. and foreign sources was separately), you must reduce each of separate line in Part II for each country $250,000 or more. the itemized deductions that are subject or possession. If you paid taxes to You used an alternative basis to the reduction by the reduction more than three countries or (discussed in Pub. 514) to determine percentage before you complete lines possessions, attach additional sheets the source of the compensation entered 2, 3a, and 4a. following the format of Parts I and II. on line 1a. Use the Itemized Deductions If you have passive income that is In addition, attach to Form 1116 a Worksheet in the Instructions for treated as general category income statement that contains the following Schedule A (Form 1040) to figure the because it is high taxed, use a separate information. reduction percentage. Divide the column in Part I. Enter HTKO on line The specific compensation income or amount on line 11 of the worksheet (the g of Forms 1116 for passive category the specific fringe benefit for which the overall reduction) by the amount on line income and general category income. alternative basis is used. 3 of the worksheet (total itemized For each such item, the alternative deductions subject to the reduction). You do not need to report TIP basis of allocation of source used. This is your reduction percentage. income passed through from a For each such item, a computation Apply this percentage (expressed as a mutual fund or other regulated showing how the alternative allocation decimal rounded to at least four places) investment company (RIC) on a was computed. to each itemized deduction subject to country-by-country basis. Total all A comparison of the dollar amount of the reduction to determine the amount income, in the applicable category, the compensation sourced within and to enter on the appropriate line of passed through from the mutual fund or without the United States under both Form other RIC and enter the total in a single column in Part I. Enter RIC on line g. the alternative basis and the time or Note. You do not need to make this Total all foreign taxes passed through geographical basis for determining the computation if the entire amount of your and enter the total on a single line in source. itemized deductions is entered on any Part II for the applicable category. You must keep documentation one of the following lines: line 2, line showing why the alternative basis more 3a, or line 4a. Just enter your reduced Lines 1a and 1b Foreign properly determines the source of the itemized deductions on that line. Gross Income compensation. Example. You are single and have Include income in the category checked an adjusted gross income of $226,800. Lines 2 Through above Part I that is taxable by the Your itemized deductions subject to the United States and is from sources 5 Deductions and Losses overall reduction (line 3 of the within the country entered on line g. You must reduce your foreign gross worksheet) total $20,000. $8,000 of You must include income even if it is income on line 1a by entering on lines 2 these deductions are definitely related not taxable by that foreign country. through 5: to the income on Form 1116, line 1a. Identify the type of income on the Any of your deductions that definitely The other $12,000 ($20,000 $8,000) dotted line next to line 1a. Do not relate to that foreign income, and are real estate taxes, which are not include any earned income excluded on A ratable share of your other definitely related. Form 2555, Foreign Earned Income, or deductions that do not definitely relate The amount of the overall reduction Form 2555-EZ, Foreign Earned Income to that foreign income, any other on line 11 of the worksheet is $1,200. Exclusion. foreign income, or U.S. source income. To figure the amount of the real estate Example. If you received dividends Do not enter any amounts on lines 2 taxes to include in the total for line 3a of (passive category income) and wages through 5 for your HTKO column. Add Form 1116, divide the amount on line (general category income) from foreign all deductions that are definitely related 11 ($1,200) by the amount on line 3 sources, you must complete two Forms or apportioned to passive income that ($20,000). This is your reduction On one Form 1116, check box a is treated as general category income percentage (6%). You must reduce (passive category income), enter the because it is high-taxed and enter the your $12,000 deduction by $720 (6% x dividends on line 1a, and write total amount of those deductions on $12,000). The reduced deduction of Dividends on the dotted line. On the line 6 in the HTKO column. Enter the $11,280 ($12,000 $720) is the other Form 1116, check box b (general amount as a negative number on your amount to enter on line 3a of Form category income), enter on line 1a Form 1116 for passive category Make a similar computation to wages not excluded on Form 2555 or income. Enter the amount as a positive figure the amount of definitely related Form 2555-EZ, and write Wages on number on your Form 1116 for general itemized deductions ($7,520) to enter the dotted line. Complete Parts I, II, and category income. on line 2. III of each Form Then, complete Do not include: Line 2 Part IV on the Form 1116 with the Deductions and losses related to larger amount entered on line 21. exempt or excluded income, such as Before you complete line 2, read If you are filing a Form 1116 foreign earned income you have! Itemized deduction limit on this excluded on Form 2555 or CAUTION! that includes foreign source page. CAUTION qualified dividends or foreign Form 2555-EZ. Enter your deductions that definitely source capital gains or losses, see relate to the gross income from foreign Instructions for Form 1116 (2009) -13-

14 sources shown on line 1a. For example, Lines 3d and 3e or 0.88). Enter the result, but do if you are an employee reporting For lines 3d and 3e, gross income not enter more than 1. foreign earned income on line 1a, means the total of your gross receipts include on line 2 expenses such as Line 4a (reduced by cost of goods sold), total those incurred to move to a new If your gross foreign source income capital and ordinary gains (before principal place of work outside the (including income excluded on Form subtracting any losses), and all other United States or supplies you bought 2555 or Form 2555-EZ) does not income (before subtracting any for your job outside the United States. exceed $5,000, you can allocate all of deductions). Do not include any interest expense your interest expense to U.S. source Line 3d. Enter your gross foreign on line 2. See lines 4a and 4b for income. Otherwise, deductible home source income from the category you special rules for interest expense. mortgage interest (including points and checked above Part I of this qualified mortgage insurance Lines 3a and 3b Form Include any foreign earned premiums) is apportioned using a gross Some deductions do not definitely income you have excluded on Form income method. Use the worksheet on relate to either your foreign source 2555 or Form 2555-EZ but do not this page to figure the amount to enter income or your U.S. source income. include any other exempt income. on line 4a. Before you complete the Enter on lines 3a and 3b any If you had income from more than worksheet, read Itemized deduction deductions (other than interest one country, you must enter income limit on page 13. expense) that: from only one country in each column. Line 4b Are not shown on line 2, and If you had to adjust your foreign Are not definitely related to your U.S. qualified dividends or capital gains (see Other interest expense includes source income. page 5), include those amounts without investment interest, interest incurred in regard to any adjustments. a trade or business, and passive Line 3a. Before you complete line 3a, activity interest. If you are a U.S. read Itemized deduction limit on page Line 3e. Enter on line 3e in each citizen, resident alien, or a domestic 13. column your gross income from all estate, and your gross foreign source Enter the following itemized sources and all categories, both U.S. income (including any income excluded deductions (from Schedule A (Form and foreign. Include any foreign earned on Form 2555 or Form 2555-EZ) does 1040)) on line 3a. income you have excluded on Form not exceed $5,000, you can allocate all Medical expenses (line 4) 2555 or Form 2555-EZ but do not of your interest expense to U.S. source General sales tax (line 5) include any other exempt income. income. Otherwise, each type of Real estate taxes (line 6) If you are a nonresident alien, interest expense is apportioned New motor vehicle taxes (line 7) include on both lines 3d and 3e your separately using an asset method. If you do not itemize deductions, income that is not effectively connected See Pub. 514 for more information. enter your standard deduction on with a trade or business in the United Example. You have investment line 3a. States. interest expense of $2,000. Your assets Line 3b. Enter on line 3b any other If you had to adjust your foreign of $100,000 consist of stock generating deductions that do not definitely relate qualified dividends or capital gains (see U.S. source income (adjusted basis, to any specific type of income. page 5), include those amounts without $40,000) and stock generating foreign Examples of these deductions are the regard to any adjustments. source income (adjusted basis, deduction for alimony paid from Form Line 3f $60,000). You apportion 40% ($40,000/ 1040, line 31a, and the additional $100,000) of $2,000, or $800 of your exemptions for housing Midwestern Divide line 3d by line 3e and round off investment interest, to U.S. source displaced individuals from Form 8914, the result to at least four decimal places income and 60% ($60,000/$100,000) of line 6. (for example, if your result is $2,000, or $1,200, to foreign source , round off to , not to income. In this example, you will enter the $1,200 apportioned to foreign source income on line 4b. You would not enter the $800 apportioned to U.S. source income on any line of Part I of Worksheet for Home Mortgage Interest Form Keep for Your Line 4a Records Line 5 If you have capital losses from foreign sources, see Foreign Qualified Note: Before you complete this worksheet, read the instructions for line 4a on this Dividends and Capital Gains (Losses) page. starting on page 5 for information on adjustments you may be required to 1. Enter gross foreign source income* of the type shown on make. Form Do not enter income excluded on Form 2555 or Form 2555-EZ Part II Foreign Taxes 2. Enter gross income from all sources. Do not enter income Paid or Accrued excluded on Form 2555 or Form 2555-EZ See page 2 for descriptions of 3. Divide line 1 by line 2 and enter the result as a decimal! foreign taxes that are eligible for (rounded to at least four places) CAUTION the foreign tax credit and foreign taxes that are not eligible for the foreign 4. Enter deductible home mortgage interest (from lines 10 tax credit. through 13 of Schedule A (Form 1040))** You can take a foreign tax credit in the tax year you paid or accrued the 5. Multiply line 4 by line 3. Enter the result here and on the foreign taxes, depending on your appropriate Form 1116, line 4a *If you have to report income from more than one country on Form 1116, complete a separate worksheet for each country. Use only the income from that country on line 1 of the worksheet. **If you were required to reduce the amount of your itemized deductions on Schedule A, enter the reduced amount of home mortgage interest on line 4 of the worksheet. method of accounting. If you report on the cash basis, you can choose to take the credit for accrued taxes by checking the accrued box in Part II. But once you choose to do this, you must credit foreign taxes in the year they accrue on all future returns. Generally, you must enter in Part II the amount of foreign taxes, in both the foreign currency denomination(s) and as converted into U.S. dollars, that -14- Instructions for Form 1116 (2009)

15 relate to the category of income 2007 to the post-2006 separate Taxes on income from American checked above Part I. Taxes are category for general category income. Samoa excluded from U.S. tax. If you related to the income if the income is Restrictions. You cannot carry a are a bona fide resident of American included in the foreign tax base on credit back to a tax year for which you Samoa, reduce taxes paid or accrued which the tax is imposed. If the foreign claimed a deduction, rather than a by any taxes attributable to excluded tax you paid or accrued relates to more credit, for foreign taxes paid or accrued. income from sources in American than one category of income, apportion However, you must reduce the amount Samoa. For more information, see Pub. the tax among the categories. The of any carryback or carryforward by the 570. apportionment is based on the ratio of amount that you would have used had Taxes on combined foreign oil and net foreign taxable income in each you chosen to claim a credit rather than gas income. Reduce taxes paid or category to the total net income subject a deduction in that year. accrued by a portion of taxes imposed to the foreign tax. See Pub. 514 for an If, for any year, you elected to claim on combined foreign oil and gas example. the foreign tax credit without filing Form income. The amount of the reduction is However, if foreign tax paid on 1116 (as explained on page 1), the the amount by which your foreign oil TIP passive income is reported to following rules apply. and gas taxes exceed the amount of you in U.S. dollars on a Form You cannot carry over unused your combined foreign oil and gas 1099-DIV, 1099-INT, or similar foreign taxes paid or accrued in a year income for the year multiplied by a statement, you do not have to convert to which the election does not apply to fraction equal to your pre-credit U.S. tax the amount shown into foreign any year for which you made the liability (for example, Form 1040, line currency. This rule applies whether or election. 44) divided by your worldwide taxable not you can make the election to claim The carryback-carryforward period is income. You may be entitled to carry the foreign tax credit without filing Form not extended if you are unable to use a over to other years taxes reduced 1116 (as explained on page 1). Enter carryback or carryforward because you under this rule. See section 907(f) taxes in Part II, column (j), and made the election. Combined foreign oil and gas income is complete columns (o) through (s) for Do not reduce the carryback or the sum of foreign oil related income each foreign country indicated in Part I. carryforward by the amount you would and foreign oil and gas extraction have used in the election year if you income. Foreign oil and gas taxes are Note. If you are taking a credit for had not made the election. the sum of foreign oil and gas additional taxes paid or accrued as the extraction taxes and foreign oil related result of an audit by a foreign taxing More information. See Pub. 514 for taxes. authority or you are filing an amended more information on carryback and Taxes on foreign mineral income. return reflecting a foreign tax refund, carryforward provisions, including Reduce taxes paid or accrued on attach a statement to Form 1116 examples. mineral income from a foreign country identifying these taxes. Line 12 or U.S. possession if you took a deduction for percentage depletion You may have to reduce the foreign under section 613 for any part of the Part III Figuring the taxes you paid or accrued by the mineral income. following items. Reduction for failure to file Form Credit Taxes on income excluded on U.S. shareholders who control a Form 2555 or Form 2555-EZ. Reduce foreign corporation must file Form Line 10 taxes paid or accrued by the taxes 5471, Information Return of U.S. You can carry back 1 year and then allocable to any foreign earned income Persons With Respect To Certain forward 10 years any foreign tax you excluded on Form 2555 or Form Foreign Corporations. If you do not file paid or accrued to any foreign country 2555-EZ. If only part of your foreign Form 5471 and furnish all of the or U.S. possession (reduced as earned income is excluded, you must information required by the due date of described under Line 12, starting on determine the amount of tax allocable your tax return, reduce by 10% all this page) on income in a separate to excluded income. To do so, multiply foreign taxes that you otherwise may category that is more than the the foreign taxes paid or accrued on take into account for the foreign tax limitation. First, apply the excess to the foreign earned income received or credit. You may have to make earliest year to which it may be carried. accrued during the tax year by the additional reductions if the failure Then, apply it to the next earliest year, following fraction. continues. See section 6038(c) and and so on. The carryback-carryforward Numerator: Foreign earned income regulations section (k) for period cannot be extended even if you and housing amounts you excluded for details and exceptions. are unable to take a credit in one of the the tax year minus otherwise deductible Note. The reduction in foreign taxes is intervening years. expenses (not including the foreign reduced by any dollar penalty imposed Special rules apply to the carryback housing deduction) allocable to that under section 6038(b). and carryforward of foreign taxes paid income. Reduction for failure to file Form or accrued on foreign oil and gas Denominator: Your total foreign U.S. partners who control a income. In addition, special restrictions earned income received or accrued foreign partnership must file Form apply to the carryforward of pre-2009 during the tax year minus deductible 8865, Return of U.S. Persons With unused oil and gas extraction taxes to expenses (including the foreign housing Respect to Certain Foreign years beginning after See section deduction) allocable to that income. Partnerships. If you do not file Form 907(f). However, if the foreign jurisdiction 8865 and furnish all of the information File Form 1040X or other amended charges tax on foreign earned income required by the due date of your tax return and a revised Form 1116 for the and some other income (for example, return, reduce by 10% all foreign taxes earlier tax year to which you are earned income from U.S. sources or a that you otherwise may take into carrying back excess foreign taxes. type of income not subject to U.S. tax) account for the foreign tax credit. You and the taxes on the other income Special rules for carryforwards of may have to make additional reductions cannot be segregated, the denominator pre-2007 unused foreign taxes. The if the failure continues. See section is the total amount of income subject to foreign taxes carried forward generally 6038(c) and regulations section foreign tax minus deductible expenses are allocated to your post (k) for details and exceptions. allocable to that income. separate income categories to which Note. The reduction in foreign taxes is those taxes would have been allocated See Pub. 514 for a comprehensive reduced by any dollar penalty imposed if the taxes were paid or accrued in a example. under section 6038(b). tax year beginning after Taxes on income from Puerto Rico Reduction of taxes or credit due to Alternatively, you can allocate unused exempt from U.S. tax. The reduction international boycott operations. In foreign taxes in the pre-2007 separate applies if you have income from Puerto general, if you agree to participate in, or category for passive income to the Rican sources that is not taxable on cooperate with, an international boycott, post-2006 separate category for your U.S. tax return. To figure the you must file Form 5713, International passive category income, and you can credit, reduce your foreign taxes paid or Boycott Report, and attach all allocate all other unused foreign taxes accrued by the taxes allocable to the supporting schedules. In addition, you in the categories that were eliminated in exempt income. See Pub. 570 for more must reduce either the total taxes information. available for credit or the credit Instructions for Form 1116 (2009) -15-

16 otherwise allowable by your foreign you must follow the rules described the allocable portion of any U.S. loss. In taxes resulting from boycott activities. If under Recapture of prior year overall later years, you will be allowed to treat you can figure the taxes specifically foreign loss accounts beginning on this part of your U.S. source income as attributable to boycott operations, enter page. If the loss in one category foreign source income. the amount on line 12. If you cannot reduces foreign source income in A U.S. loss includes a rental loss on figure the amount of taxes specifically another category and that second property located in the United States. If attributable to boycott operations, category has a separate limitation loss you have any qualified dividends or multiply the credit otherwise allowable account with respect to the first capital gains (including capital gain by the international boycott factor category, then the two offsetting distributions) or losses for the taxable (figured on Schedule A (Form 5713), separate limitation loss account year and you are required to make any International Boycott Factor) and enter balances are netted for purposes of adjustments to those amounts, as the result on Form 1116, line 28. Attach determining the amount of income in explained earlier under Foreign a statement to Form 1116 showing in either category that is subject to Qualified Dividends and Capital Gains detail how you figured the reduction. recharacterization under Recapture of (Losses) starting on page 5 or the For more information, see Form separate limitation loss accounts on instructions for line 17, the amount of 5713 and its instructions. page 17. your U.S. loss is the excess of: Capital losses. In determining your a. The total of the amounts entered Line 13 U.S. source income, reduce the amount on line 14 for each Form 1116 you are You must adjust the amount you enter of any capital losses from U.S. sources filing, over on line 13 if you have foreign taxes that by the amount you entered on line 4 of b. The amount entered on line 17 of relate to passive income that is treated Worksheet A or line 5 of the Line 2 the Form as general category income because it Worksheet for Worksheet B. If you have 3. Recapture of prior year overall is high-taxed. On your Form 1116 for capital losses from U.S. sources and foreign loss accounts. If you had an passive category income, reduce the you did not use either Worksheet A or overall foreign loss in a prior year that amount you enter on line 13 by the Worksheet B, see Pub. 514 to offset U.S. source income, a part of amount of your foreign taxes that relate determine your U.S. source income. your foreign income (in the same to that income. In the space above line Example. For 2009, you completed category as the loss) is recharacterized 13, enter HTKO and the amount of three Forms The first had a loss as U.S. source income in each the reduction as a negative number (in from general category income of $2,000 following tax year. parentheses). On your Form 1116 for on line 14, the second had passive general category income, increase the The part of your total foreign income category income of $4,000 on line 14, amount you enter on line 13 by the subject to recharacterization is the and the third had income of $1,000 amount of your foreign taxes that relate lesser of the following: from the certain income re-sourced by to that income. In the space above line treaty category on line 14. You must a. The total amount of maximum 13, enter HTKO and the amount of allocate the $2,000 loss between the potential recapture in all overall foreign the increase. passive category income and the loss accounts. The maximum potential certain income re-sourced by treaty recapture in any account for a category Line 14 category in the same proportion as is the lesser of: The amount on line 14 is your taxable each category s income bears to the i. The current year taxable income income (or loss), before adjustments, total foreign income. from foreign sources in that category from sources outside the United States. The amount of the loss that would (the amount from line 14, less any If the amount on line 14 is zero or a reduce passive category income would adjustment for allocation of losses, as loss, you generally have no foreign tax be 80% ($4,000/$5,000) of the $2,000 described earlier under Allocation of credit for the category of income loss or $1,600. Include the $1,600 (in foreign losses and Allocation of U.S. checked above Part I of this Form parentheses) on line 15 of the passive losses for that category), or However, you must complete line category income Form Assuming ii. The balance in the overall foreign 15 and continue with the form even if you have no other line 15 adjustments, loss account for that category. line 14 is zero or a loss. enter $2,400 ($4,000 $1,600) on line b. 50% (or more, if you choose) of 16 of that form. your total taxable income from foreign Line 15 sources. You are required to increase or The amount of the loss that would If the total foreign income subject to decrease the amount on line 14 by the reduce the certain income re-sourced recharacterization is the amount following adjustments. The adjustments by treaty would be 20% ($1,000/ described in a above, then for each must be made in the order listed. If you $5,000) of the $2,000 loss or $400. separate category the recapture have more than one adjustment, enter Include the $400 in parentheses on line amount is the maximum potential the net adjustment on line 15 and 15 of the certain income re-sourced by recapture amount for that category. If attach a detailed statement showing treaty Form Assuming you have the total foreign income subject to your computation. See Pub. 514 for no other line 15 adjustments, enter recharacterization is the amount more details on each of these $600 ($1,000 $400) on line 16 of that described in b above, then for each adjustments. form. separate category the recapture The adjustments are: In this case, all of the $2,000 loss amount is computed by multiplying the 1. Allocation of foreign losses. If was allocated between the foreign total recapture amount by the following you have a loss on line 14 of one Form source passive category income and fraction: 1116 and you have income on line 14 the certain income re-sourced by treaty category, and no reduction was made Maximum potential recapture amount of one or more other Forms 1116, you to U.S. source income. for the overall foreign loss account in must reduce the foreign income by a the separate category pro rata share of the loss before you If you receive general category use any remaining loss to reduce U.S. income in a later year, you must Total amount of maximum potential source income. recharacterize all or part of that income recapture in all overall foreign loss If the loss reduces foreign source as passive category income and certain accounts income, you create, or increase the income re-sourced by treaty in that later year. See the example under Reduce the amount on line 14 by balance of, a separate limitation loss Recapture of separate limitation loss including (in parentheses) on line 15 account and you must recharacterize accounts on page 17. the amount of the recapture for the the income you receive in the loss 2. Allocation of U.S. losses. If you category checked above Part I as category in later years. See Recapture have a net loss from U.S. sources, determined above. Be sure to attach of separate limitation loss accounts on proportionately allocate that loss among your computation. If you elect to page 17. In situations where the loss to the separate categories of your foreign recapture more of an overall foreign be allocated exceeds foreign income in income. Reduce the income on line 14 loss than is required (b above), show in other categories, the excess reduces (adjusted by any allocation of losses, your computation the percentage of U.S. source income (as modified below as described under Allocation of foreign taxable income recharacterized and the under Capital losses), you create, or losses in these line 15 instructions) by dollar amount recharacterized. increase the balance in, an overall foreign loss account and for later years, including (in parentheses) on line Instructions for Form 1116 (2009)

17 Attach a statement to Form 1116 recharacterized income as a negative that tax year to the extent it offsets showing the balance in each separate number (in parentheses). foreign source taxable income for any category overall foreign loss account. Example. Using the facts in the preceding tax year (in which you chose See Regulations section 1.904(f)-1(b) example under Allocation of foreign to claim the foreign tax credit) because for more information. losses on page 16, in the next year of a carryback. Dispositions of certain property. (2010), you have $5,000 of general Domestic loss. A domestic loss is If you generated foreign source gain in category income, $3,000 of passive the amount by which the U.S. source the same category as the overall category income, and $500 of certain gross income for the tax year is foreign loss on a disposition of property income re-sourced by treaty. Because exceeded by the sum of the expenses, that was used predominantly in a $1,600 of the general category income losses, and other deductions properly foreign trade or business and that loss was used to reduce your passive allocated or apportioned to that income. generated foreign source income in the category income in 2009, $1,600 of Determine this amount by taking into same category as the overall foreign your 2010 general category income account any net operating loss carried loss, then the gain on the disposition must be recharacterized as passive forward from a prior tax year (but not may be subject to recharacterization as category income. Similarly, $400 of the any loss carried back). If you have any U.S. source income to the extent of general category income must be capital gains or losses, take them into 100% of your foreign source taxable recharacterized as certain income account after any adjustments required income. This is true whether or not you re-sourced by treaty. On your 2010 earlier under Foreign Qualified would otherwise recognize gain on the Form 1116 for passive category Dividends and Capital Gains (Losses). disposition. See section 904(f)(3). income, you would include $1,600 on The above rule also generally line 15. On your 2010 Form 1116 for Line 17 applies to a gain on the disposition of certain income re-sourced by treaty, If you have qualified dividends or stock in a controlled foreign corporation you would include $400 on line 15. On capital gains, you may be required to (CFC), if you owned more than 50 your 2010 Form 1116 for general make adjustments to those qualified percent (by vote or value) of the stock category income, you would include dividends and gains before you take right before you disposed of it. See ($2,000) on line 15. those amounts into account on line 17. section 904(f)(3)(D) for more Also, individuals have to adjust their Recharacterizing income from a information and exceptions. TIP taxable income before exemptions if separate category does not Reduce line 14 by including (in they file Form 8914, Exemption Amount result in recharacterizing any parentheses) on line 15 the smallest of for Taxpayers Housing Midwestern tax. (a) the amount of the gain not Displaced Individuals. 5. Recapture of overall domestic recaptured above, (b) the remaining loss accounts. If you have an overall Individuals Who Completed a amount of the overall foreign loss not domestic loss for any tax year Qualified Dividends and Capital recaptured in earlier years or in the beginning after 2006, you create, or Gain Tax Worksheet current year, or (c) the amount from line increase the balance in, an overall 14 (less any adjustment for allocation of If you completed the Qualified domestic loss account and you must losses, as described under Allocation of Dividends and Capital Gain Tax recharacterize a portion of your U.S. foreign losses and under Allocation of Worksheet in the instructions for your source taxable income as foreign U.S. losses in these line 15 instructions, tax return, you must use the Worksheet source taxable income in succeeding and any adjustment for any recapture for Line 17 on page 18 to figure the years for purposes of the foreign tax above). See Pub. 514 if you disposed amount to enter on line 17 if: credit. of property described above and you 1. You file Form 1040 and recognized foreign source gain in a The part that is treated as foreign a. Line 7 of your Qualified Dividends different category than the overall source taxable income for the tax year and Capital Gain Tax Worksheet is foreign loss, you recognized U.S. is the smaller of: greater than zero, and source gain, or you did not recognize The total balance in your overall b. Line 16 of your Qualified gain. domestic loss account in each separate Dividends and Capital Gain Tax category (less amounts recaptured in 4. Recapture of separate limitation Worksheet is less than line 17 of that earlier years), or loss accounts. If, in a prior tax year, worksheet, or 50% of your U.S. source taxable you reduced your foreign taxable 2. You file Form 1040NR and income for the tax year. income in the category checked above a. Line 5 of your Qualified Dividends Part I by a pro rata share of a loss from You must establish and maintain and Capital Gain Tax Worksheet is another category, you must separate overall domestic loss greater than zero, and recharacterize in 2009 all or part of any accounts for each separate category in b. Line 14 of your Qualified income you receive in 2009 in that loss which foreign source income is offset Dividends and Capital Gain Tax category. If you have separate limitation by the domestic loss. The balance in Worksheet is less than line 15 of that loss accounts in the loss category each overall domestic loss account is worksheet. relating to more than one other the amount of the overall domestic loss category and the total balances in subject to recapture. The Adjustment exception. If you qualify those loss accounts exceed the income recharacterized income is allocated for the adjustment exception, you can you receive in 2009 in the loss among and increases foreign source elect not to adjust your qualified category, then income in the loss income in separate categories in dividends and capital gains. You make category is recharacterized as income proportion to the balances of the overall this election by not completing the in those other categories in proportion domestic loss accounts for those Worksheet for Line 17. You must make to the balances of the separate separate categories. You increase the this election if you have any foreign limitation loss accounts for those other amount on line 14 (as adjusted by any qualified dividends or foreign capital categories. You recharacterize the of the other adjustments previously gains (or losses) and you chose not to income by: mentioned in these line 15 instructions) make any adjustments to those Increasing the amount on line 14 of the Form 1116 for each of the amounts when you completed lines 1a (adjusted by any of the other separate categories to which the and 5. You cannot make this election if adjustments previously mentioned in recharacterized income is allocated. you have any foreign qualified these line 15 instructions) of the Form Overall domestic loss defined. In dividends or foreign capital gains (or 1116 for each of the separate a tax year you choose to claim the losses) and you made adjustments to categories, other than the loss foreign tax credit, the overall domestic those amounts when you completed category, previously reduced by loss is the domestic loss for that tax lines 1a and 5. In this case, complete including on line 15 any recharacterized year to the extent it offsets foreign the Worksheet for Line 17. income and source taxable income for that tax year If you are not required to complete Decreasing the amount on line 14 or for any preceding tax year (in which the Worksheet for Line 17 or you (adjusted by any of the other you choose to claim the foreign tax qualify for the adjustment exception and adjustments previously mentioned in credit) because of a carryback. If you elect not to adjust your qualified these line 15 instructions) of the Form do not choose to claim the foreign tax dividends and capital gains, enter on 1116 for the loss category by including credit for a tax year, the overall line 17 of Form 1116 your taxable on line 15 the amount of domestic loss is the domestic loss for income without the deduction for your Instructions for Form 1116 (2009) -17-

18 exemption (for example, the amount Completing the Worksheet for elect not to adjust your qualified from Form 1040, line 41), minus any Line 17. If you do need to complete dividends and capital gains. You make amount shown on Form 8914, line 6. the Worksheet for Line 17, do the this election by not completing the Adjustment exception for Form following. Worksheet for Line 17. You must make 1040 filers. You qualify for the Lines 2 through 5. Skip these this election if you have any foreign adjustment exception if you meet both lines. qualified dividends or foreign capital of the following requirements: Line 6. Enter the amount from: gains (or losses) and you chose not to Line 13 of the Qualified Dividends make any adjustments to those 1. Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet in the amounts when you completed lines 1a and Capital Gain Tax Worksheet does Form 1040 instructions, or and 5. You cannot make this election if not exceed: Line 11 of the Qualified Dividends you have any foreign qualified $208,850 if married filing jointly or and Capital Gain Tax Worksheet in the dividends or foreign capital gains (or qualifying widow(er); Form 1040NR instructions. losses) and you made adjustments to $104,425 if married filing those amounts when you completed separately; Line 8. Enter the amount from: lines 1a and 5. In this case, complete $171,550 if single; or Line 10 of the Qualified Dividends the Worksheet for Line 17. You qualify $190,200 if head of household. and Capital Gain Tax Worksheet in the for the adjustment exception if: 2. The amount of your foreign Form 1040 instructions, or source net capital gain, plus the 1. Line 5 of the Qualified Dividends Line 8 of the Qualified Dividends and amount of your foreign source qualified Tax Worksheet or line 23 of Schedule Capital Gain Tax Worksheet in the dividends is less than $20,000. For this D (Form 1041) does not exceed Form 1040NR instructions. purpose, ignore any capital gain $8,200, and distributions or qualified dividends you Complete all other lines as instructed 2. The amount of your foreign elected to include on Form 4952, line on the worksheet. source net capital gain, plus the 4g. Estates and Trusts That amount of your foreign source qualified dividends, is less than $20,000. For this Completed a Qualified Adjustment exception for Form purpose, ignore any foreign source 1040NR filers. You qualify for the Dividends Tax Worksheet or qualified dividends or capital gains that adjustment exception if you meet both Schedule D you elected to include on Form 4952, of the following requirements: If you completed the Qualified line 4g. 1. Line 5 of the Qualified Dividends Dividends Tax Worksheet in the and Capital Gain Tax Worksheet does instructions for Form 1041 or you Your foreign source net capital not exceed: completed Part V of Schedule D (Form TIP gain is the excess of your 1041), you must use the Worksheet for a. $208,850 if you checked filing foreign source net long-term Line 17, below, to figure the amount to status box 6, capital gain over your foreign source enter on line 17 if: b. $104,425 if you checked filing net short-term capital loss. status box 3, 4, or 5, or 1. You figured your tax using the c. $171,550 if you checked filing Qualified Dividends Tax Worksheet, If you are not required to complete status box 1 or 2. line 5 of that worksheet is greater than the Worksheet for Line 17 or you 2. The amount of your foreign zero, and line 14 of your Qualified qualify for the adjustment exception and source net capital gain, plus the Dividends Tax Worksheet is less than elect not to adjust your qualified amount of your foreign source qualified line 15 of that worksheet, or dividends and capital gains, enter on dividends is less than $20, You figured your tax using the line 17 of Form 1116 the estate s or Part V of Schedule D (Form 1041), line trust s taxable income without the 23 of the Schedule D is greater than deduction for its exemption. Your foreign source net capital TIP gain is the excess of your zero, and line 32 of the Schedule D is less than line 33. Completing the Worksheet for foreign source net long-term Line 17. If you do need to complete capital gain over your foreign source Adjustment exception. If you qualify the Worksheet for Line 17, do the net short-term capital loss. for the adjustment exception, you can following. Worksheet for Line 17 (Worldwide Qualified Dividends and Capital Gains) Keep for Your Records Caution: See the instructions for Line 17 beginning on page 17 before starting this worksheet. 1. Individuals: Enter the amount from Form 1040, line 41 (minus any amount on Form 8914, line 6). If you are a nonresident alien, enter the amount from Form 1040NR, line 38 (minus any amount on Form 8914, line 6). Estates and trusts: Enter taxable income without the deduction for your exemption Enter your worldwide 28% gains (see instructions) Multiply line 2 by Enter your worldwide 25% gains (see instructions) Multiply line 4 by Enter your worldwide 15% gains and qualified dividends (see instructions) Multiply line 6 by Enter your worldwide 0% gains and qualified dividends (see instructions) Add lines 3,5,7, and Subtract line 9 from line 1. Enter the result here and on Form 1116, line Instructions for Form 1116 (2009)

19 Lines 2 through 5. Skip these income without the deduction for your Complete Part IV on only one Form lines. exemption (for example, the amount 1116 (the one with the largest amount Line 6. Enter the amount from line from Form 1040, line 41), minus any entered on line 21) to summarize the 11 of the Qualified Dividends Tax amount shown on Form 8914, line 6. credits you figured on all of your Forms Worksheet or line 29 of Schedule D. If you do need to complete the However, if you completed a Line 8. Enter the amount from line Worksheet for Line 17, do the following. Form 1116 for category e (lump-sum 8 of the Qualified Dividends Tax Line 2. Enter the amount (if any) distributions) or c (section 901(j) Worksheet or line 26 of Schedule D. from line 31 of the Schedule D Tax income), do not use Part IV of that Worksheet. Form 1116 as your summary. Enter the Taxpayers Who Completed the credits from line 21 of all of your Forms Schedule D Tax Worksheet Line 4. Enter the amount (if any) 1116 on lines 22 through 25 of the from line 28 of the Schedule D Tax If you figured your tax using the Form 1116 with the largest amount Worksheet. Schedule D Tax Worksheet (in the entered on line 21 to summarize your Schedule D (Form 1040) instructions or Line 6. Enter the amount (if any) credits. File the other Forms 1116 as in the Schedule D (Form 1041) from line 22 of the Schedule D Tax attachments. instructions), you must use the Worksheet. Line 8. Enter the amount (if any) Line 27 Worksheet for Line 17 on page 18 to figure the amount of tax to enter on line from line 19 of the Schedule D Tax Enter the smaller of line 19 or line of Form 1116 if: Worksheet. Note. Generally, line 26 will exceed Line 17 of the Schedule D Tax Complete all other lines as instructed line 19 only if you have U.S. capital Worksheet is greater than zero, and on the worksheet. gains or qualified dividends that are Line 34 of the Schedule D Tax subject to the capital gain rate Worksheet is less than line 35. Line 19 differential (figured in the Worksheet for Adjustment exception. If you qualify If you are completing line 19 for Line 17 on page 18). for the adjustment exception, you can separate category e (lump-sum elect not to adjust your qualified distributions), enter the amount from Paperwork Reduction Act Notice. dividends and capital gains. You make line 5 of the Worksheet for Lump-Sum We ask for the information on this form this election by not completing the Distributions on page 4. to carry out the Internal Revenue laws Worksheet for Line 17. You must make Do not complete line 19 for separate of the United States. You are required this election if you have any foreign category c (section 901(j) income). See to give us the information. We need it to qualified dividends or foreign capital page 3. ensure that you are complying with gains (or losses) and you chose not to these laws and to allow us to figure and make any adjustments to those For all other applicable categories, collect the right amount of tax. amounts when you completed lines 1a complete line 19 as follows. You are not required to provide the and 5. You cannot make this election if Form 1040 filers. Enter the amount information requested on a form that is you have any foreign qualified from Form 1040, line 44, less any tax subject to the Paperwork Reduction Act dividends or foreign capital gains (or included on line 44 from Form unless the form displays a valid OMB losses) and you made adjustments to Form 1040NR filers. Enter the control number. Books or records those amounts when you completed amount from Form 1040NR, line 41, relating to a form or its instructions lines 1a and 5. In this case, complete less any tax included on line 41 from must be retained as long as their the Worksheet for Line 17. You qualify Form contents may become material in the for the adjustment exception if: Form 1041 filers. Enter the amount administration of any Internal Revenue 1. The amount of your foreign from Form 1041, Schedule G, line 1a. law. Generally, tax returns and return source qualified dividends plus the information are confidential, as required amount of your foreign source net Line 21 by section capital gain is less than $20,000, and The maximum foreign tax credit you The time needed to complete and 2. Line 17 of the Schedule D Tax can claim in the current year is file this form will vary depending on Worksheet (Form 1040) is less than or generally limited to the allocated individual circumstances. The equal to: amount of U.S. tax imposed on the estimated burden for individual foreign income, or the actual amount of taxpayers filing this form is approved $208,850 if married filing jointly or foreign tax paid or accrued on the under OMB control number qualifying widow(er); foreign income (after reductions and is included in the estimates shown $104,425 if married filing separately; required on line 12), whichever is less. in the instructions for their individual $171,550 if single; or However, see Foreign Taxes Eligible income tax return. The estimated $190,200 if head of household for a Credit on page 2 for additional burden for all other taxpayers who file (or, for trusts and estates, line 17 of the information. this form is: Recordkeeping, 2 hr., 43 Schedule D Tax Worksheet (Form If the amount on line 20 is smaller min.; Learning about the law or the 1041) is less than or equal to $8,200). than the amount on line 13, see form, 1 hr., 6 min.; Preparing the Your foreign source net capital Pub. 514 for more information on form, 2 hr., 46 min.; Copying, TIP gain is the excess of your carryback and carryforward provisions, assembling, and sending the form to foreign source net long-term including examples. the IRS, 1 hr., 4 min. capital gain over your foreign source If you have comments concerning net short-term capital loss. Ignore any the accuracy of these time estimates or foreign source qualified dividends or Part IV Summary of suggestions for making this form capital gains that you elected to include on Form 4952, line 4g, in determining Credits From Separate the amount of your foreign source Parts III qualified dividends and net capital gain. If you are not required to complete the Worksheet for Line 17 or you qualify for the adjustment exception and elect not to adjust your qualified income listed above Part I. dividends and capital gains, enter on line 17 of Form 1116 your taxable Complete lines 22 through 25 in Part IV only if you must complete more than one Form 1116 because you have more than one of the categories of simpler, we would be happy to hear from you. You can write to the IRS at the address listed in the instructions of the tax return with which this form is filed. Instructions for Form 1116 (2009) -19-

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